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After Its Steep Decline, Jumia Is a Speculative Buy

It’s been a fantastic year for e-commerce stocks in general. Thanks to the novel coronavirus, the world has shifted its consumption to digital channels faster than anyone had imagined possible. As a result, nearly all online shopping stocks are up big in 2020. That’s with the exception of Jumia (NYSE:JMIA). JMIA stock is up just 14% year-to-date and has fallen 27% over the past 12 months.

Source: Shutterstock

However, don’t mistake the flat returns for a sleepy stock. Jumia’s shares quadrupled at one point earlier this summer. Then, equally quickly, it gave back nearly all those gains. Such is life for companies such as Jumia that operate in fast-evolving technological areas within emerging markets. Jumia is a high-risk, high-reward investment. After the recent tumble, however, odds again favor the bulls, as long as you keep the following factors in mind.

Jumia Soars and Then Skids

In July, it appeared that JMIA stock would join the e-commerce party. Shares surged from $6 to a high of $21 in just a few weeks. The company didn’t announce much in the way of news to justify this move. Rather, it seems that traders aggressively plowed into stock options on JMIA, buying tens of thousands of contracts to bet on an earnings beat when the company dropped its upcoming Q2 results.

Instead, the Q2 results were underwhelming, to put it mildly. The company hardly benefited from the e-commerce wave, and shares got shellacked for a 30% loss in the immediate aftermath of that Q2 report. The company did see active customers rise 40% on the quarter. However, overall order volume only nudged up 8%. That’s not the sort of figure you’d expect in a pandemic.

The company’s marketplace revenues grew nicely, but were largely offset by a large decline in its own first party sales. The company showed a significantly smaller operating loss on the quarter, which is indeed good. However, much of that simply came from Jumia spending much less on sales and marketing. At a time like this, you’d think Jumia might press the accelerator on marketing efforts, rather than reducing its outreach efforts.

Still, it might be surprising that JMIA stock has crashed all the way back to $8 following that earnings report. Why are investors in such a foul mood now? Some of it goes back to lingering concerns about Jumia from last year.

Questions Around the Company

Jumia got off to a hot start after its initial public offering (IPO). The stock soared to $40 at one point, and folks were quick to label it the Amazon (NASDAQ:AMZN) of Africa. Unfortunately, this didn’t end up working out well for early investors. Short sellers, including Citron Research, raised some substantial doubts about the company’s operations.

In particular, some of Jumia’s JForce agents changed prices and inflated revenues to increase their sales commissions. Jumia acknowledged as much. Jumia said that while wrongdoing occurred, it was of a tiny scale compared to the overall business and that it has fired the employees that were responsible for the malfeasance.

And, to be fair, this sort of thing happens frequently in emerging markets. The Chinese e-commerce companies, for example, have long been dogged with concerns about so-called “brushing,” where artificial transactions allegedly occur between related parties and drive up a company’s overall gross merchandise value. Obviously, the Chinese e-commerce companies have been able to overcome these worries and see their share prices soar. However, investors in Jumia should do their own work on this scandal before taking a large position in the stock.

While the sales questions are fairly normal for a young e-commerce company in an emerging market, there’s another issue as well. Jumia’s tech team is in Portugal, and it has executives in Germany and the United Arab Emirates. Investors have gotten the sense that Jumia is not all-in on success in Africa, and some folks say that the IPO was simply a way for insiders to cash out.

JMIA Stock Verdict

Building the Amazon of Africa is a worthy goal. In all likelihood, some company will be successful in that aim sooner or later. Most other regions of the world have a strong local e-commerce peer. But few were overnight successes.

For example, South America’s MercadoLibre (NASDAQ:MELI) was founded in 1999, listed its stock in 2007, but didn’t do much of anything in terms of share price performance until 2016. And South America is much more developed and regionally-integrated in terms of trade agreements than Africa is so far.

Jumia launched in 2012 – 13 years after MercadoLibre – and is working in more difficult macroeconomic conditions. All that to say that Jumia is facing a real challenge, and it’s not surprising that the company has faced growing pains since its IPO.

Could Jumia turn things around? Absolutely. There’s a good argument for taking a small position on JMIA stock as a sort of option play. The stock started trading post-IPO at $40 and is at $8 now. Just returning to its initial level of optimism – let alone further growth – could deliver several times the up-front investment.

Do know, on the other hand, that the company is running large losses and could run into financial trouble or have to dilute its shareholders to keep operating.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2020/09/after-its-steep-decline-jumia-stock-is-a-speculative-buy/.

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